My bet with Andrew Lilico
Following today's mildly encouraging inflation figures, Chris Giles observed that a number of economists had predicted that quantitative easing would lead to "hyperinflation", which now seems highly unlikely to materialise. This provoked a conversation between me, Chris, Giles Wilkes, Pawel Morski, and ECONOMIST HULK, in which Andrew Lilico expressed his view that if we returned to healthy growth, inflation would inevitably follow. Andrew argued:
If economy's back to growing faster, inflation will go back to rising. Betcha!
I disagree with Andrew; I think the UK has plenty of spare capacity, and is quite capable of sustaining a period of growth above the historical trend (about 2%) without a sharp rise in inflation. So we agreed a bet. Andrew's prediction is that if real GDP growth goes above 2% then inflation (as measured by the CPI) will rise above 5%, within 18 months. So, for example, if GDP in the four quarters to the end of 2013 is more than 2% higher than GDP in the four quarters to the end of 2012, then Andrew's prediction is that the CPI will rise more than 5% at some point before the end of the second quarter of 2015.
The bet is £1000 (in 2012 pounds - after all if Andrew wins then 2015 pounds will be worth much less!). Watch this space..